How Much is Enough?
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9 August 2013 - 23:23, by , in Activity-Based Cost Management, No comments

According to a 1998 Yankelovich survey, one in three adults said they would accept a smaller paycheck in exchange for a simpler lifestyle. It seems that more and more people are asking themselves, both personally and professionally, “Is more better?”

A few years ago I witnessed a college class learn the cost of complexity versus the brilliance of simplicity. The professor separated the students into teams. Each team was assigned a specific car manufacturer, e.g. Ford, General Motors, Honda, Toyota, etc. Using sales brochures gathered at dealerships, each team was assigned the task of estimating how long it would take each car manufacturer to make one of every possible combination of model, color and options in their list of product offerings. The students’ findings were surprising and enlightening.

It would take Honda approximately one day to make one of every possible combination of model, color and options in their sales brochure. For Toyota, one month. But, for General Motors it would take one million years! Honda satisfied their growing base of customers with fewer models, colors and options than the competition. Simplicity helped Honda become the low cost producer of a high quality product. Honda’s strategy was to meet customer needs with simplicity, not complexity.

How long would it take your company to produce one of every product using your current configuration of materials, machines and manpower? Would you be like Honda or GM?

The consequences of complexity are fivefold:

  1. Complexity causes additional overhead and inventory.
  2. Complexity causes process bottlenecks and constraints.
  3. Complexity causes frustration.
  4. Complexity causes added cycle time.
  5. Complexity causes errors.

Simplicity’s evil twin is unnecessary complexity. Here are three steps to simultaneously improve and simplify your organization:

STEP 1: Take Inventory
How many activities does it take from start to finish to produce or process a customer order? Activity Based Management (ABM) provides the techniques and tools to answer this important question. Define activities by department and then map them into cross-functional business processes. Most organizations have 150 to 200 different activities that fit into 10 to 15 business processes.

STEP 2: Theory of Ones
After taking your activity inventory, question each current process. Ask “Why can’t our process be done in one activity, by one person, in one place using materials from one supplier?” Use the Theory of One to identify targets for improvement.

STEP 3: Standardize, Synchronize and Simplify
Ask suppliers, customers and employees for ideas that will help standardize, synchronize and simplify your processes. ABM is a common sense, common language to involve non-financial people in process improvement. The book “Using ABM for Continuous Improvement” (to order call 817.483.6511) explains in step-by-step fashion “how to” use activity accounting to simplify business processes.

Lack of clarity creates cost and confusion. How much is enough? Only you can answer that question. And until you do, it will limit you and your business. Take steps today to simplify.

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Tom Pryor
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